Treasuries Gain as Confidence Falls More Than Forecast

By Susanne Walker -
Feb 25, 2014

Treasuries gained, pushing 10-year
note yields to the lowest level in five days, as a gauge of
consumer confidence fell more than forecast this month, fueling
demand for the safety of U.S. government debt.

The U.S. auction of $32 billion in two-year debt, the first
of four note sales this week, drew the highest demand in eight
months from a category of investors including foreign central
banks. Ten-year note yields fell from almost the 100-day moving
average as another report showed home prices in the U.S. rose at
a slower pace in the year through December. Stocks fell from
yesterday’s record intraday high as risk appetite ebbed.

“Data of late have been on the weaker end of
expectations,” said Dan Mulholland, head of Treasury trading at
BNY Mellon Capital Markets in New York. “Equities are at the
all-time highs -- maybe people are taking chips off the table
and putting some cash in Treasuries.”

Ten-year yields dropped four basis points, or 0.04
percentage point, to 2.7 percent at 5 p.m. New York time,
according to Bloomberg Bond Trader data. It was the lowest level
since Feb. 20. Yields earlier approached the 100-day moving
average at 2.75 percent. The price of the 2.75 percent security
due in February 2024 increased 10/32, or $3.13 per $1,000 face
amount, to 100 13/32.

Yields on current two-year notes were little changed at
0.31 percent.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 28.7 percent to
$291 billion. It touched $367 billion on Feb. 20, the highest
level since Feb. 7. The average this year is $322 billion.

Volatility Falls

Volatility in U.S. government securities as measured by the
Bank of America Merrill Lynch MOVE Index fell to 56.8,
approaching a nine-month low of 55.99 it reached on Feb. 18. It
was 67.26 on Feb. 5, the highest since Jan. 9. The average this
year is 63.71.

Treasuries have lost 0.3 percent this month, compared to a
gain of 1.8 percent in January, according to the Bloomberg U.S.
Treasury Bond Index. They have returned 1.5 percent this year,
versus a 3.4 percent drop in 2013, the index (SPX) shows.

Treasuries were boosted today by fixed-income funds that
manage portfolios against benchmark indexes and typically
purchase longer-maturity Treasuries at month-end to align their
holdings’ interest-rate sensitivity with the indexes. Barclays
Plc said via e-mail its U.S. Aggregate Index will extend its
duration, the measure of rate sensitivity, by 0.10 year on March
1, compared with 0.09 year on Feb. 1.

Note Auction

At today’s auction, the securities drew a yield of 0.34
percent, the lowest since November. The bid-to-cover ratio,
which gauges demand by comparing total bids with the amount of
securities offered, was 3.6, the highest since December, versus
an average of 3.3 at the past 10 sales.

Indirect bidders, the category that includes foreign
central banks, purchased 34.3 percent of the notes, the most
since the June two-year auction, compared with an average of
25.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place
their bids directly with the Treasury, bought 19.3 percent,
versus an average of 22.3 percent for the past 10 auctions.

“For the two-year, there’s just money to be put to work
there; there always is,” Thomas Roth, senior Treasury trader in
New York at Mitsubishi UFJ Securities USA Inc., said before the
auction.

More Sales

The U.S. plans auctions tomorrow of $13 billion in two-year
floating-rate notes and $35 billion in five-year debt, and a
sale on Feb. 27 of $29 billion of seven-year securities.

When added to a $9 billion sale of 30-year Treasury
Inflation Protected Securities on Feb. 20, the auctions total
$118 billion. They will raise $49.1 billion of new cash, as
maturing securities held by the public total $68.9 billion,
according to the U.S. Treasury.

Yields fell today as the Conference Board’s index of U.S.
consumer confidence decreased to 78.1 from a revised 79.4 in
January that was weaker than initially estimated, the New York-based private research group reported today. Economists in a
Bloomberg survey forecast a reading of 80.

The Standard & Poor’s 500 Index of equities ended the day
at 1,845.12, down 0.1 percent, after falling earlier as much as
0.4 percent. It touched a record 1,858.71 yesterday.

The S&P/Case-Shiller index of property values in 20 cities
rose 13.4 percent from December 2012 after increasing 13.7
percent in the year ended in November, the group said today in
New York. It was the first deceleration since June. The gain
matched the forecast of economists surveyed by Bloomberg.

‘It’s Unclear’

“It’s unrealistic to make long-term judgments off current
data, because it’s unclear,” said Tom Tucci, managing director
and head of Treasury trading in New York at CIBC World Markets
Corp. “We won’t know for the next one to two months. People
have correlated it to weather conditions.”

Treasuries also gained as investors sought to cover short
positions, or bets that the securities would decline in value,
as this week’s auctions loomed.

“The street was caught short for supply,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New
York, one of 22 primary dealers that trade with the Fed. “We’re
grinding higher” in prices.

Investors in Treasuries increased short positions in the
week ended yesterday, a survey by JPMorgan Chase & Co. showed.

The proportion of net shorts was six percentage points,
according to JPMorgan. The figure compares with a net long
position of four percentage points in the week ending Feb. 17.
The proportion of outright shorts, or bets the securities will
drop in value, increased to 25 percent, from 17 percent the
previous week. The proportion of outright longs dropped to 19
percent, from 21 percent.